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Chapter 1: Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Closing Case The Evolution of
Wal-Mart
Book Title: Strategic Management: An Integrated Approach Theory & Cases
Printed By: Preeti Mutiara Binti Yacob (preetimutiaray@tarc.edu.my)
© 2017 Cengage Learning, Cengage Learning

Chapter Review
Closing Case The Evolution of Wal-Mart

Wal-Mart is one of the most extraordinary success stories in business history. Started in
1962 by Sam Walton, Wal-Mart has grown to become the world’s largest corporation. In
2014, the discount retailer—whose mantra is “Everyday low prices”—had sales of more than
$475 billion, close to 11,000 stores in 27 countries, and more than 2.2 million employees.
Some 8% of all retail sales in the United States are made at a Wal-Mart store. Wal-Mart is
not only large; it is also very profitable. Between 2005 and 2014, the company’s average
ROIC was 14.1%–better than its well–managed rivals, Costco and Target, which earned
11.8% and 11%, respectively.

Wal-Mart’s persistently superior profitability is based on a number of factors. In 1962, Wal-

Mart was one of the first companies to apply the self-service supermarket business model
developed by grocery chains to sell general merchandise. Unlike rivals such as K-Mart and
Target that focused on urban and suburban locations, Sam Walton’s Wal-Mart concentrated
on small, southern towns that were ignored by its rivals and which had enough demand to
support one large discount store. Walton realized that, in rural America, people would drive
an hour to Wal-Mart in a small town rather than drive 2 to 3 hours to a major city. This meant
that a small town with a population of 25,000 actually had a catchment area containing
100,000 people.

Wal-Mart grew quickly by pricing its products lower than those of local retailers, often putting
them out of business. By the time its rivals realized that many small towns could support
one large discount general merchandise store, Wal-Mart had already pre-empted them and
had spread out to small towns across America.

Over time, the company became an innovator in information systems, logistics, and human
resource practices. Actions taken in these functional areas resulted in higher productivity
and lower costs as compared to rivals, which enabled the company to earn a high ROIC
while charging low prices. Wal-Mart led the way among U.S. retailers in developing and
implementing sophisticated product-tracking systems using bar-code technology and
checkout scanners. This information technology enabled Wal-Mart to track what was selling
and adjust its inventory accordingly so that the products found in each store matched local
demand. By avoiding overstocking, Wal-Mart did not have to hold periodic sales to shift
unsold inventory. Over time, Wal-Mart linked its information system to a nationwide network
of distribution centers in which inventory was shipped from vendors, and then shipped out
on a daily basis to stores within a 400-mile radius. The combination of distribution centers
and information systems enabled Wal-Mart to reduce the amount of inventory it held in
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stores, and thus to devote valuable space to selling and to reduce the amount of capital it
had tied up in inventory.

With regard to human resources, Sam Walton set the tone. He held a strong belief that
employees should be respected and rewarded for helping to improve the profitability of the
company. Underpinning this belief, Walton referred to employees as “associates.” He
established a profit-sharing plan for all employees and, after the company went public in
1970, a program that allowed employees to purchase Wal-Mart stock at a discount to its
market value. Wal-Mart was rewarded for this approach by high employee productivity,
which translated into lower operating costs and higher profitability.

As Wal-Mart grew, its sheer size and purchasing power enabled it to drive down the prices
that it paid suppliers and to pass on those savings to customers in the form of lower prices–
which enabled Wal-Mart to gain more market share and hence lower prices even further. To
take the sting out of the persistent demands for lower prices, Wal-Mart shared its sales
information with suppliers on a daily basis, enabling them to gain efficiencies by configuring
their own production schedules for sales at Wal-Mart.

By the 1990s, Wal-Mart was already the largest seller of general merchandise in the United
States. To keep growing, it started to diversify into the grocery business, opening 200,000-
square-foot supercenter stores that sold groceries and general merchandise under the
same roof. Wal-Mart also diversified into the warehouse club business with the
establishment of Sam’s Club. The company began expanding internationally in 1991 with its
entry into Mexico. Today, Wal-Mart generates $175 billion in foreign sales.

For all its success, Wal-Mart is now encountering very real limits to profitable growth. The
U.S. market is saturated, and growth overseas has proved more difficult than the company
hoped. The company was forced to exit Germany and South Korea after losing money
there, and it has faced difficulties in several developed nations. Moreover, rivals Target and
Costco have continued to improve their performance, and Costco in particular is now
snapping at Wal-Mart’s heels.

Sources: “How Big Can It Grow?” The Economist (April 17, 2004): 74–78; “Trial by
Checkout,” The Economist (June 26, 2004): 74–76; Wal-Mart 10-K, 2013,
www.walmartstores.com; R. Slater, The Wal-Mart Triumph (New York: Portfolio Trade
Books, 2004); “The Bulldozer from Bentonville Slows; Wal-Mart,” The Economist (February
17, 2007): 70; K. Perkins, “Wal-Mart still faces challenges, but its scale should allow it to
compete amid fierce rivalry,” Morningstar, December 2, 2014.

Case Discussion Questions

1. What was Sam Walton’s original strategic vision for Wal-Mart? How did this
enable the company to gain a competitive advantage?

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2. How did Wal-Mart continue to strengthen its competitive advantage over time?
What does this teach you about the source of a long-term competitive
advantage?

3. By the early 1990s, Wal-Mart was encountering limits to growth in the US.
How did it overcome these limits to growth? Explain how the expansion
moves that Wal-Mart made in the 1990s made economic sense and helped to
create value for the company’s shareholders.

4. Wal-Mart is once again encountering limits to growth. Why do you think this is
the case? What might Wal-Mart do to push back these limits?

5. How much of Wal-Mart’s strategy do you think was planned at the outset, and
how much evolved over time in response to circumstances? What does this
suggest to you about the nature of strategy development?

Chapter 1: Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Closing Case The Evolution of
Wal-Mart
Book Title: Strategic Management: An Integrated Approach Theory & Cases
Printed By: Preeti Mutiara Binti Yacob (preetimutiaray@tarc.edu.my)
© 2017 Cengage Learning, Cengage Learning

© 2019 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means -
graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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